Two-thirds of the 850 companies surveyed by rating agency Crisil want to shift, but the benefits are unlikely to result in higher investments by them immediately, the agency said Tuesday.
The government had last month announced a massive 10- 12 percentage points reduction in corporate tax rate to 25.17 percent in a bid to push investment-ironically at a time when already the existing capacity across industries is heavily underutilised as demand keeps falling month after month.
While announcing the massive tax giveaways to the tune of Rs 1.45 lakh crore, government had said companies would have to give up all existing tax exemptions to be eligible to move to the new regime.
However, the agency did not attribute any reasons these many companies, which are from capex-heavy sectors such as power, and oil & gas, which want to continue with the older tax regime and the two-thirds of them planning to switch come from the auto, chemicals, textiles, gems and jewellery, and retail sectors.
The move to lower corporate tax “spawns optimism with a tinge of cautiousness within companies”, Crisil said, pointing out that while the prospect of saving on taxes makes them optimistic, they are well aware that savings alone cannot lead to immediate capex given the weak demand which is the root of their caution.
“Companies shifting to the new tax regime are likely to see close to 700 bps of tax savings. While this may not kick-start the much-delayed private investments cycle, it can help ease their funding constraints to some extent,” Crisil’s head of analytics Subodh Rai said.
Only 10 percent of those companies planning to shift to the new regime are planning to pass on the gains through higher discounts and sales promotion, indicating lower taxes alone cannot rev up the idling demand engine, it said.
About half of these companies want to use the savings for ongoing capex, reduce debt or retain cash, which would strengthen their balance-sheets and prime them for fresh capex once demand improves, he said.
Around 37 percent of these companies are yet to decide on utilisation of tax savings though option to increase dividends found the least preference–something many analysts had lapped up soon after the announcement saying it would lead to consumption demand due to higher disposable income.
Overall, tax cut provides the much-needed impetus to companies to press the capex button once demand stages a comeback, the agency concluded.